From even before its creation, the Consumer Financial Protection Bureau, with its single, all-powerful director who the President can only remove for cause, has been controversial. See July 2010 Clarks’ Secured Transactions Monthly, “Special Report: Powerful Consumer Protection Bureau Is Centerpiece of New Financial Reform Law.” Despite longstanding concerns about the CFPB, it was not until October 18th of last year that the Supreme Court had the opportunity to grant a certiorari petition challenging the CFPB’s constitutionality. Unfortunately, it is far from certain whether that case, Seila Law LLC v. Consumer Financial Protection Bureau, will actually result in a ruling on the constitutionality of the CFPB’s structure. Come March 3, when the Court hears oral argument, we should have some insight into whether the Court will reach the merits of the Seila Law challenge or save consideration of the CFPB’s constitutionality for another day.
While efforts continue to eliminate the Consumer Financial Protection Bureau (CFPB), as explained by Matthew Clark in our prior story, the controversial federal agency has been shifting its enforcement efforts from ruling by individual cases and administrative rule-making to broader supervision of the industry players and a “kinder, gentler” regulatory environment. In December 2019, the CFPB published a white paper entitled “Supervisory Highlights/ Consumer Reporting Special Edition.” The Special Edition sets forth a number of compliance issues that continue to arise, particularly in the home mortgage market, the consumer auto loan market, and the consumer deposit relationship. The purpose of this newsletter story is to summarize the agency’s supervisory findings and to serve as a compliance guideline for players in the consumer credit reporting arena.
In 2010, Article 9 of the UCC was amended to require financing statements of individual debtors to reflect the precise name of an individual debtor as found on his or her driver’s license. Failure to comply renders the security interest unperfected and voidable by a trustee in bankruptcy. That’s what happened in a recent bankruptcy case from Kansas. We think the case was correctly decided.
On June 1, 2015, the United States Supreme Court ruled that a debtor in a Chapter 7 bankruptcy may not wipe out a junior mortgage when the debt owed on the senior mortgage exceeds the present value of the property. The decision, penned by Justice Thomas, was unanimous. The irony of the decision, which could apply to personal property as well as real estate, is that the Court felt compelled to follow a 1992 decision even though it strongly suggested that the earlier decision was flat wrong in its interpretation of the Bankruptcy Code. From a policy perspective, the decision not only respects precedent, but should make second mortgage loans more affordable. Bank of America, N.A. v. Caulkett, 135 S. Ct. 1995, 2015 U.S. LEXIS 3579 (2015).
Accounts receivable financing can be done in a great variety of ways. The most typical pattern is a loan to the assignor secured by accounts on a “nonnotification” basis, where the account debtors make payments to the assignor until notified of the assignment following the assignor’s default. Once notified to deflect payments to the secured lender, the account debtors get into big trouble if they continue to pay the assignor. The other end of the spectrum is a classic factoring arrangement, where the accounts are sold at a discount to the secured lender, and the account debtors are notified up front to make all their payments directly to the lender.
In our prior story, we focused on the recent Kansas case which applies a “strict compliance” standard requiring the use of the debtor’s driver’s license name as the name that must be used on an individual debtor’s financing statement. Let’s turn now to six elements of flexibility in the statute.
In a notable federal court decision from Oregon, one member of an LLC took a security interest in another member’s membership interest as collateral for a loan. When the debtor defaulted, the lender exercised “strict foreclosure” on the membership interest under the rules of Article 9. The court ruled that the debtor could not later invalidate the strict foreclosure on the ground that the value of the collateral greatly exceeded the debt. The decision seems correct, though it could come out differently in a bankruptcy setting or under the fraudulent conveyance laws of some states.
In the world of letters of credit, a sharp distinction must be drawn between outright transfer of the letter itself and a collateral assignment of proceeds payable by the issuer upon a conforming draw.
A handy option to holding a UCC foreclosure sale is to retain the collateral in satisfaction of the obligation, as authorized by UCC 9-620 through UCC 9-622. This “strict foreclosure” approach has historical antecedents in the law of real property, particularly the deed in lieu of foreclosure.
Does Article 9 of the UCC require a financing statement to contain “within its four corners” a specific description of collateral, or does incorporating a description by reference to a physically unattached security agreement sufficiently “indicate” the collateral? In a recent decision from Illinois, the bankruptcy court had ruled that a financing statement fails to perfect a security interest unless it “contains” a separate and additional description of the collateral. The bankruptcy court ruled that incorporation of the security agreement by reference did not do the job.
To what extent are governmental agencies exempt from the rules of Article 9 when they are administering various loan programs authorized by federal statute? In United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979), the Supreme Court held that federal law should control, but concluded that “nondiscriminatory state law” was the most appropriate source of rules for courts dealing with the rights and duties of federal agency lenders. Absent a congressional directive to the contrary, the source of the federal law of secured transactions will be Article 9 as adopted in the state where the transaction takes place.
Once the issuer has honored a draft drawn under a standby letter of credit, it has a statutory right of reimbursement from the applicant. UCC 5-108(i). This poses a credit risk for the issuer. Since the statutory reimbursement claim is unsecured, the issuer is unlikely to collect much on its claim if the applicant files bankruptcy. If a commercial letter is involved, this risk is reduced because the issuer can hold the bill of lading until the applicant either pays or arranges for credit.
In a recent decision from Mississippi, a bankruptcy court has ruled in favor of a surety over the construction lender’s perfected security interest in a retainage. The surety’s victory was based on a claim of equitable subrogation, outside the scope of Article 9. The Mississippi case is the latest of a long line of decisions favoring the surety in this important and recurrent priority scenario.
The prior article focuses on the Puerto Rico bankruptcy and whether bondholders with security interests in employer-contributed funds received post-petition “proceeds” of prepetition assets under Section 522(b) of the Bankruptcy Code. In the present article, we analyze three analogous types of assets: hotel rentals, equipment lease rentals, and license royalties.
UCC 9-406 provides that an account debtor on an account, chattel paper or a payment intangible may discharge its obligation by paying the assignor until, but not after, the account debtor receives a deflection notice, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned, and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.
Public pensions provide monthly benefits to retired public employees. To raise the money, public pensions invest with contributions from public employees and employers. Another way that a public pension may raise money is by issuing bonds, and a public pension may grant a security interest in its property to those who purchase the bonds. Because one of a pension fund’s most valuable assets is its right to contributions from employers, a pension fund may grant a security interest in those contributions to those who purchase the bonds.
The courts usually give secured lenders leeway in finding an enforceable security agreement even though there are no “words of grant”, there is no formal document captioned as a security agreement, and it requires the creation of a collage out of a number of documents. The courts generally focus on function over form. The doctrine usually comes up with respect to secured creditors who are not institutional lenders. A leading bankruptcy case from Kansas provides a good example.
The First Circuit has decided a matter of first impression at the federal appellate level: whether Article 9 of the UCC governs the taking and perfection of a security interest in a right to payment arising under an insurance policy. Affirming two lower courts, the First Circuit concluded that Article 9 did not govern perfection in such collateral. Instead, Maine common law governed. Since the secured lender did nothing more than file a UCC financing statement, the debtor’s trustee in bankruptcy got the insurance proceeds under the strongarm clause.
A significant recent decision from North Dakota considers whether the UCC rules displace common law claims with respect to bank liability and whether, in a check fraud case, the three-year UCC statute of limitations bars the plaintiff’s claims. The court ruled that the plaintiffs were time-barred.
The most recent “full payment check” case comes from Virginia, where the court rejects the debtor’s claim of an accord and satisfaction under the UCC Rule, based on a finding of “bad faith” by the debtor in tendering an $890 money order in full payment of a $63,000 mortgage loan.